Question

Thorp Inc. maintains a defined benefit pension plan for its employees. Pension plan balances as at January 1, 2020 include:    

Projected Benefit Obligation (PBO), January 1, 2020	$ 600,000
Plan assets at market-related value, January 1, 2020	$ 550,000
Prior service cost (PSC- OCI)1	$ 150,000
Average remaining service period	15 years
Service cost	$ 90,000
Expected returns on plan assets	8%
Actual returns earned on plan assets	$40,000
Actuarial interest rate	4%
Contributions paid	$ 150,000
Benefits to retirees in 2020	$ 100,000
Loss from change in actuarial assumption, December 31, 2020	$ 46,000

¹ These prior service costs are from 2019 and already included in PBO on January 1,2020.

Required:

1. Determine the pension expenses recognized in 2020.
2. Prepare the journal entries to reflect the accounting for the pension plan for 2020.
3. Prepare the ending balances (31 December 2020) for plan assets, PBO, and calculate net pension liability.
4. What will be the expected impact of the current pandemic (Covid-19) on PBO?  

Answer 1

(a) Pension expenses to be recognized in 2020 = $78052

(b)

(c) Ending balances (31 December 2020) for plan assets = $594000

Ending balances (31 December 2020) for PBO = $532052

Ending balances (31 December 2020) for net pension liability = -$61948

(d) Due to pandemic COVID 19 many companies are experiencing difficulties in financial operations resulting in limited resources and reduced profit form business or loss from operations. Also, COVID 19 have impacted financial market very badly which will impact reduced return on investment. Hence COVID 19 may result into reduced contribution in defined benefit obligation and reduced return on plan asset which will ultimately impact employee's retirement benefits.

Working Note:

$51973 = (1/1.04^14)*90000